Via SovereignMan.com

August 2, 2017

Santiago, Chile

Today is one of those days when I feel blessed to have such wonderful and interesting people in my life.

A few months ago I introduced you to Ben Yu, a Silicon Valley-based entrepreneur who’s easily one of the most unique people I know.

I first met Ben when he came to our summer entrepreneurship camp a few years ago.

I knew instantly that he was bright… and different.

MD: Doesn’t sound like attributes of a person who would attend an “entrepreneurship camp” does it? Do you really think real entrepreneurs need a camp … or that they can be created at such a camp? You’ve got to love the internet. Here’s what Ben Yu has to say about himself.

Here’s a quote from that link:

“These were the peak years of my life–I would never be so vigorous, so energetic, so passionate and mentally capable ever again, and I was spending them in mere preparation of the future, not participating in it.”

MD: i.e. “fire”, “aim”, “ready”. What’s not to love about our budding new billionaires and those who are breeding them.

He had already won the prestigious Peter Thiel fellowship, dropped out of Harvard, and started a successful company (in which I invested, alongside many of our Total Access members).

MD: And also from that link:

His next challenge is to build an e-commerce start-up that will revolutionize price comparison on the web.

MD: What do you bet he has no clue what money is … and he’s going to “revolutionize” price comparison? … like traders don’t do that every minute of every day … intuitively?

I wonder if we’re going to learn what that company was about.

Among his many talents and interests, Ben is heavy into cryptocurrency.

MD: Whoops. Well now we know he doesn’t know what money is don’t we!

And a few days ago as he was reading the latest Howard Marks investment memo, something caught his eye.

Howard Marks, of course, is the billionaire founder of Oaktree Capital.

His regular investment memos are highly insightful, and on Monday we told you about the latest commentary in which Marks cast a stark warning to investors.

Marks plainly states in his latest commentary that market valuations are at their highest levels in history…

… that complacency is at record levels, i.e. investors seem to think that the good times will last forever…

… that risk levels are quite high, while returns are incredibly low…

… and that investors are engaging in some damn foolish behavior.

Among them, Mark cites multiple examples of how investors are lining up to buy bonds issued by bankrupt governments.

MD: … “bankrupt governments” … as if there was any other kind.

In June, for instance, Argentina issued billions of dollars worth of bonds with a 100-year maturity.

Bear in mind that Argentina defaulted at least five times on its debt in the previous 100 years.

So it seems likely that the minuscule return investors will receive completely fails to compensate them for the risks they are taking.

MD: Right … like they’re stupid? Argentina can kiss control of their own natural resources goodbye … given up for a song. This isn’t rocket science folks!

Marks also wrote about cryptocurrency as an example of foolish behavior.

MD: Sounds like Marks has a clue. But I’ll bet he doesn’t know what money is.

On the topic of Bitcoin, ether, etc., Marks states simply, “They’re not real!” and “nothing but an unfounded fad.”

MD: But watch when he tells us what “real” really is. Wanna bet it’s gold?

And so… my friend Ben Yu took the liberty of emailing Howard Marks to engage him on the topic of cryptocurrency.

Ben was polite, but incisive as always, saying that Bitcoin is “no more or less real than any shared concept of money. . .”

His point is that the dollar isn’t “real” either. It’s merely a concept that people believe in.

MD: The dollar is the media from an “improper” MOE process. If we were talking about a HUL from a “proper” MOE process, he could make the same statement. But in the case of the HUL (Hour of Unskilled Labor units), the people have a “reason” … a proof … to believe. Simple, irrefutable logic … self inflicted. Everyone was once a HUL themselves. I wonder if the brilliant Ben can see the light when it’s shown to him.

Plus, over 90% of all US dollars in circulation, in fact, are already in digital form.

MD: Which is irrelevant. “All” of them in circulation … even those in savings and under mattresses … are “in-process promises to complete trades over time and space” … all created by traders, and all ultimately promised to be returned and destroyed, only to be resupplied by traders making new time/space spanning trades. Unfortunately the dollar has a 4% leak and directs all taxes to the money changers. But none the less, it “is” real money … just from an “improper” MOE process.

When you log in to your bank account and see a number printed on a screen, that account balance exists almost exclusively in bank databases.  There’s very little “real” paper currency that exists.

So in this respect the dollar is also predominantly a digital currency.

MD: What’s crucial is how the dollar is created. As with all real money, it is created by traders. Unlike “proper” real money, a select segment of the traders (governments and banks) is allowed to openly counterfeit it (i.e. create it with no intention of returning and destroying it) … and with insufficient interest collections (less than those defaults) that delivers the 4% leak. They call it “time value of money”.

The primary structural difference between the dollar and Bitcoin is that the dollar is completely centralized.

MD: That’s a difference without a distinction. They are both “improper”. The Bitcoin is counterfeited through its “mining” metaphor. The Dollar is counterfeited overtly by government just sending them out to employees and suppliers and contractors … with no intention of ever earning them back through delivery … they just roll them over and never deliver. That’s counterfeiting … plain and simple.

It’s controlled by an unelected committee of central bankers who wield dictatorial authority over its quality and supply.

MD: Even that is a fiction. The Rothschilds control (own) all but two of those banks in the entire world … and two others have come under their control in the last 15 years … enabled by the 911 inside job!

Bitcoin, on the other hand, is DECENTRALIZED, i.e. controlled by its community of users.

MD: Centralization isn’t the issue. The “process” is the issue. You must maintain perfect supply/demand balance for the money itself. You must perpetually adhere to the relation: INFLATION = DEFAULT – INTEREST = zero … everywhere.

Currencies have existed in various forms since nearly the dawn of civilization, and our ancestors used everything imaginable as a medium of exchange.

MD: Right … and all were clumsy stand-ins for “real” money.

Salt. Rice. Giant, immovable stones. Gold.

In the early days of the United States back in the late 1700s, people even commonly used whiskey as a medium of exchange. Worst case you could always drink it.

MD: I rest my case. You can’t drink a “promise”. You can only deliver on it … and if you don’t, other deadbeats paying interest deliver for you … and they don’t forget what you did … i.e. broke our promise.

Each of those currencies worked because people had confidence in them.

MD: If they worked, it’s because they were better than any of the inferior alternatives … until they weren’t. Then they quit working. A “proper” MOE process has never been tried? Why? Because you can’t make money off it. You can’t manipulate it to your advantage (business cycle). You can’t start wars with it. You “must” deliver on your promises. The marketplace will see that you do … or they will take you down.

In Medieval Japan people knew that if they received rice as a payment, that same rice would be accepted as payment for goods or services somewhere else.

For people who truly understand cryptocurrency, Bitcoin has inspired similar confidence for its users.

MD: No it hasn’t … any more than Charles Ponzi’s scheme of arbitraging stamps was capable of returning 100% in just two months. It worked until it predictably quit working.

And with good reason. The technical design of Bitcoin solves a number of major problems that plague conventional banking and monetary systems.

MD: He asserts … without enumerating any of those major problems and how Bitcoin solves them.

But if you don’t understand something, it’s hard to trust it. It’s hard to have confidence in it.

MD: Do you understand that the mysterious collapse of WTC7 proves beyond all doubt that 9/11 was an inside job  … that we are an occupied country with an occupied government? Cognitive dissonance is more powerful than rational thinking and logic. And greed and blind luck trump work and careful planning every time … until they don’t.

Howard Marks admits he is in that camp. And he actually responded to Ben. Personally.

I thought that was pretty cool. And he was quite gracious.

In his reply, he agreed with the value premise of cryptocurrency, saying “The dollar has value because people accord value to it. Bitcoin may be no different.”

But he went on to conclude that:

“My issue is that (as I understand it), people can create their own bitcoin, whereas they can’t create their own dollars. . . To me, the idea that people can create currency and have it accepted as legal tender makes no sense. But maybe I just don’t understand.”

MD: Doesn’t get it does he. He doesn’t know that traders have “always” created money. They are the only creators of money. And they always return and destroy it. If they don’t it’s called “counterfeiting”. Correct Howard … you don’t understand. Maybe go back and look at his “rice” example. People can create that too.

It was an honest, thoughtful response. And one that Ben has probably heard a number of times before. I certainly have.

Marks is a highly accomplished, sophisticated investor. And he admits he doesn’t understand Bitcoin.

MD: What he doesn’t understand is how a distributed block-chain ledger works. And Ben probably doesn’t either. What it does is use well known ciphering techniques to guarantee that forgery is not possible … and to deliver perfect transparency. Each block in the chain is seed for the subsequent block. Change a block and you disrupt all subsequent blocks. They become unreadable. Thus, you can’t change one … or any entry in one. It’s all about stifling forgery … while we have openly tolerated government counterfeiting as long as we’ve had governments. Go figure.

I know a number of other accomplished, sophisticated investors, many of whom are household names. They don’t understand it either.

It’s common in human nature to fear, or at least be suspicious, of what we don’t understand.

And that’s the typical refrain I hear from very sharp financial minds, “I don’t understand Bitcoin, I think it’s a scam.”

MD: Most “sophisticated” investors just have inside information. They have a “fair” advantage … delivered to them by the governments they institute. They are the money changers.

Ignorance doesn’t make something a scam.

MD: It usually takes a thief to expose a scam.

And given how big the cryptocurrency opportunity is, it’s certainly worth learning about before passing judgment.

Cryptocurrency is the future. Governments, major banks, tax authorities, stock exchanges, and even central banks are moving towards crypto.

MD: And you’ve seen nothing about what they’re actually doing. I guarantee, if they have a “mining” component in the process, they don’t get it.

It’s worth understanding.

But frankly it works both ways: while it’s foolish to disregard something out of ignorance, it may be even more foolish to buy something that you don’t understand.

Countless people are buying Bitcoin right now with zero understanding of its structure, challenges, or opportunities.

They’ve never heard of hash functions or SegWit. They’re just gambling that the price is going higher.

MD: And the value of “real” money “never” goes higher or lower. Don’t you think that would be a dead give away?

This is crazy.

There is absolutely no substitute for learning.

MD: Oh really? Look at all the divinity students! All studying a myth … in ever and ever greater detail … to the point that if they ever did see the light and realize it’s a myth, they have too much invested to admit it!

There is no substitute for logic and rational thinking … but it sure is hard to find in the wild.

And if you’re looking for an easy place to get started, Ben also took the liberty of writing an easy-to-understand article: Cryptocurrency 101.

You can read it here.

MD: We’ll, looks like we’ll have to go there. I’ll bet when we do it will become evident that we won’t really know what’s going on until we get to the 501 level … and then we’ll have too much invested to admit we’ve been had.

Until tomorrow,

Simon Black

Founder, SovereignMan.com